On Balance: Application of BCA in Europe

April 26, 2018

By Henrik Andersson

Despite the obvious attraction of Benefit-Cost Analysis (BCA) for policy evaluation, its implementation rate varies across countries and sectors. Although the concept of BCA can be traced back to European thinkers, it was first applied in the United States. The evaluation by the U.S. Army Corps of Engineers’ of the U.S. Flood Control Act of 1936 is often regarded as the first use of BCA, but President Ronald Reagan’s Executive Order 12291 issued in 1981 provided considerable impetus to its use in the United States. Although perceptions of BCA as anti-regulatory caused some adversaries of BCA to argue for its elimination in policy making, BCA is now viewed also as a tool to promote regulation.

Recent years have witnessed growing demand for economic appraisals of policies in different sectors in Europe, but the implementation rate is still low compared to that in the United States. The United Kingdom is considered the early adopter of BCA in Europe with appraisals of transport projects in the early 1960s. At the European level, represented by the European Commission (EC) within the European Union (EU), while BCA was used for policy evaluation in the early 1990s, the rate of use was very low. More recently, however, the application of BCA has risen, accompanied by the availability of national guidelines and manuals on how to conduct BCA, as well as by the development of the EC’s Guide to Cost-Benefit Analysis of Investment Projects for Cohesion Policy 2014-2020, which evolved from a brief document to a comprehensive document (now in its 5th version) backed by EU legislation.

A Symposium in the Spring Issue of the Journal of Benefit Cost Analysis explores examples of how BCA is being applied in different sectors, countries, and institutional settings in Europe. The Symposium consists of four articles with two covering national experiences, and two covering experiences from the EU level.

One of the national studies focuses on how nonmarket valuation (and BCA) has been imbedded in decision-making in the United Kingdom, using case studies from the water sector and conservation policies as examples. Overall, the authors find that the use of BCA has saved considerable resource costs, and are positive in their assessment of environmental valuation in the United Kingdom. The other national study discusses the evolution of the use of BCA in the Swedish transport sector, which began to switch in the 1970s from an engineering perspective to an economic welfare approach. The authors describe how BCA has indeed grown in importance, even if policy implementation is not based on strict BCA rules. The first study focusing on BCA at a European level provides a comprehensive review and an empirical examination of the role of BCA in the context of the EU Cohesion policy. The authors describe the requirement for both financial, and more classical BCA, appraisal of projects. The authors highlight the importance of methodological developments and BCA guidance that has occurred over the years, and show that BCA indeed can be applied also in complex intergovernmental setting such as the EU. The fourth and final article of the symposium also describes the application of BCA in EU regulation. The authors review BCA within the framework of the EU’s REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) Regulation, providing background on the authorization process and presenting a critical discussion of its implementation to date. The novelty of REACH is that the responsibility of conducting the BCA is placed on affected industry instead of the authorities; the authors describe and discuss this approach and how any shortcomings can be addressed.

The Symposium articles support the generally held view that Europe lags the United States when it comes to using BCA for policy evaluation. However, the past couple of decades have seen a change, with BCA becoming more accepted and more widely implemented in European policy making, at both the national and European levels. The articles in the Symposium provide four illustrations of this development. Common to the symposium articles is also a recognition of the challenge of implementing a relatively straightforward evaluation tool in actual decision making.

Henrik Andersson is an Associate Professor at Université Toulouse 1 Capitole and researcher at Toulouse School of Economics. His research mainly concerns methodological and empirical issues of the evaluation of non-marketed goods using revealed- and stated-preference techniques, and pricing of externalities.